Globalization and Offshoring of SoftwareDocument Transcript
Globalization and Offshoring of Software*
William Aspray (Indiana University), Frank Mayadas (Sloan
Foundation), Moshe Y. Vardi (Rice University)
Computer science and technology have been stunningly
successful in forging a global market. Through these tools,
the IT industry has created innovations that have driven
data and voice communication costs to almost zero; added
Web features that provide information to anyone, anywhere,
anytime; driven hardware costs so low that this technology
is affordable in developing countries; developed
standardized curricula, and made educational material
widely available; and agreed on software standards that
enable different machines and system to interoperate.
Globalization has resulted in billions of people joining the
free-market world, and dozens of countries joining the World
Trade Organization. This trend has produced a world where
not only goods are globally tradable, but so is labor, which
can be sent over a wire rather than physically relocated.
ACM's Job Migration Task Force undertook an in-depth study
of software offshoring: extent and magnitude, perspectives
of key countries and companies, globalization of research
activities, risks and exposures involved, and counter-
balancing steps underway or contemplated in key countries.
The study's findings, released earlier this year, point to continuing growth in the IT
sector in both developing and developed countries; unlike the perception in the media,
offshoring has not has an adverse impact on IT employment in developing countries. At
the same time, the study points out to an intensifying competition within the global IT
market. The study suggests increased investment in education and innovation to sustain
countries' competitive edge and technological leadership position.
The material in this paper is based on Globalization and Offshoring of Software, W. Aspray, F. Mayadas,
and M.Y. Vardi (eds.), 2006. Reprinted with permission from the Association of Computing Machinery
(ACM). See full report at http://www.acm.org/globalizationreport/.
1. Software Globalization: The Big Picture
Over the past decade, low-wage countries such as India have developed vibrant,
export-oriented software and IT service industries. Attracted by available talent,
quality work, and most of all low cost, companies in high-wage countries, such as
the United States and the United Kingdom, are increasingly offshoring software and
service work to these low-wage countries. Trade (together with automation) cost
many jobs in the manufacturing sector to be lost from the West and many
developing nations in East Asia to increase their wealth and industrial prowess since
1970. Changes in technology, work organization, educational systems, and many
other factors have caused service work—previously regarded as immune to these
forces—also to become tradable. This trade in services, led by the trade in software
and IT-enabled services, presents many opportunities and challenges for individuals,
firms, and policymakers in both developed and developing nations.
Many people in the United States and Western Europe fear that sending software
work offshore will cause wage and job suppression in the high-wage countries.
Others believe that the process of getting good labor at lower prices will make the
economy more productive, enabling the creation of new wealth and new jobs. Many
people in the low-wage countries are excited by the economic development that their
software and service industries are bringing them; while some are concerned about
the side effects such as congestion, pollution, and loss of traditional cultural values.
One thing that is clear is that the globalization of software is here to stay, so that
policymakers, educators, and employers all need to address the realities of
offshoring. This includes, for example, how to help people whose jobs are shipped to
another country to get assistance with their careers, how to create innovative
environments that help to create new jobs, and how to revamp educational systems
for the realities of a globalized world.
“Offshoring” is the term used here. It is a term that applies best to the United
States because, even though the United States does outsource work to Canada and
Mexico, most of its work is sent over the seas—mostly to India, but also to China,
Malaysia, the Philippines, and many other places. Germany, for example, also sends
work across its borders, including to Eastern Europe, but there is no water—no shore
—to cross. Some of the work that is offshored is sent to entrepreneurial firms
established in these low-wage countries. Other times, multinationals headquartered
in high-wage countries open subsidiaries in the low-wage countries to work on
products and services for their world market. Multinationals may also open facilities
in these low-wage countries in order to better serve the local market there, but that
situation is not the primary interest of this study.
There are at least six kinds of work sent offshore related to software and
information technology: (1) programming, software testing, and software
maintenance; (2) IT research and development; (3) high-end jobs such as software
architecture, product design, project management, IT consulting, and business
strategy; (4) physical product manufacturing—semiconductors, computer
components, computers; (5) business process outsourcing/IT Enabled Services—
insurance claim processing, medical billing, accounting, bookkeeping, medical
transcription, digitization of engineering drawings, desktop publishing, and high-end
IT enabled services such as financial analysis and reading of X-rays; and (6) call
centers and telemarketing. Our primary interest is with the first three of these
categories, which are the ones most closely associated with the transfer of software
work across national boundaries. However, it is almost impossible to study offshoring
without at least at times considering the other three categories of work as well. This
is because companies that do one of these kinds of software work may also do
several other kinds of offshore work as part of their product and service line of
offerings; and companies that send work offshore may send work of several kinds.
Because companies and industries intermingle these categories of work, so does
most statistical data that tracks this industry—and it is often impossible to
disaggregate data to capture information about only the categories of work of
greatest concern here. Thus we focus on the first three categories but discuss the
others in passing.
The countries that send work offshore are primarily developed nations. The United
States followed by the United Kingdom have been the largest offshorers, but other
countries in Western Europe, Japan, Korea, Australia, and even India send work
offshore. The countries that receive the work fall into four categories: (1) those that
have available a large workforce of highly educated workers with a low wage scale
(e.g., India, China); (2) those that have special language skills (e.g., the Philippines
can serve the English and Spanish customer service needs of the United States by
being bilingual in these languages); (3) those that have geographic proximity
(“nearsourcing”), familiarity with the work language and customs, and relatively low
wages compared to the country sending the work (e.g. Canada accepting work from
the United States, the Czech Republic accepting work from Germany); and (4)
special high-end skills (e.g., Israeli strength in security and anti-virus software).
There are many drivers and enablers of offshoring. These include: (1) The dot-com
boom years witnessed a rapid expansion of the telecommunications system, making
ample, low-cost broadband available in many countries at attractive rates. This made
it possible to readily transfer the data and work products of software offshoring. (2)
Software platforms were stabilized, with most large companies using a few standard
choices: IBM or Oracle for database management, SAP for supply chain
management, and so on. This enabled offshoring suppliers to focus on acquiring only
these few technologies and the people who are knowledgeable about them. (3)
Companies are able to use inexpensive commodity software packages instead of
customized software, leading to some of the same standardization advantages as
with software platforms. (4) The pace of technological change was sufficiently rapid
and software investments became obsolescent so quickly that many companies
chose to outsource IT rather than invest in technology and people that would soon
have to be replaced or retrained. (5) Companies felt a competitive need to offshore
as their competition began to do so. (6) Influential members from industry, such as
Jack Welch from General Electric, became champions of offshoring. (7) Venture
capitalists pushed entrepreneurial startups to use offshoring as a means to reduce
the burn rate of capital. (8) New firms emerged to serve as intermediaries, to make
it easier for small and medium-sized firms to send their work offshore. (9) Work
processes were digitalized, made routine, and broken into separable tasks by skill set
—some of which were easy to outsource. (10) Education became more globally
available with model curricula provided by the professional computing societies, low
capital barriers to establishing computer laboratories in the era of personal
computers and package software, national plans to build up undergraduate education
as a competitive advantage, and access to Western graduate education as
immigration restrictions were eased. (11) Citizens of India and China, who had gone
to the United States or Western Europe for their graduate education and remained
there to work, began to return home in larger numbers, creating a reverse Diaspora
that provided highly educated and experienced workers and managers to these
countries. (12) India has a large population familiar with the English language, the
language of global business and law. (13) India has accounting and legal systems
that were similar to those in the United Kingdom and the United States. (14) Global
trade is becoming more prevalent, with individual countries such as India and China
liberalizing their economies, the fall of Communism lowering trade barriers, and
many more countries participating in international trade organizations.
At first it was believed that the only software work that would be offshored was
low-level work, such as routine software maintenance and testing, routine business
office processes, and call centers. Offshoring suppliers, however, have made strong
efforts to move up the value chain and provide services that have higher value
added because this is where there is the greatest opportunity for profit. Research
and development, project integration, and knowledge process outsourcing such as
reading X-rays and doing patent checking are increasingly being offshored. Today,
some people believe that any kind of software or IT-enabled work can be offshored.
While there is an element of truth in this belief, there are some important caveats.
Some kinds of work have not been offshored. Even if it is possible to offshore a
particular type of work, it does not mean that every job of that type actually will be
offshored. In fact, there are a number of reasons why a company might not wish to
offshore work: (1) the job process has not been made routine. (2) The job cannot be
done at a distance. (3) The infrastructure is too weak in the vendor country. (4) The
offshoring impacts too negatively on the client firm such as the client firm losing
control over an important work element, losing all its in-house expertise in an area,
or too high a loss of worker morale in the client firm. (5) Risks to privacy, data
security, or intellectual property are too high. (6) There are not workers in the
supplier firm with the requisite knowledge to do the job, which happens for example
when the job requires application domain knowledge as well as IT knowledge. (7)
Costs of opening or maintaining the offshore operation are too expensive. (8) There
are cultural issues that stand between the client and vendor. (9) The company can
achieve its goal in another way, such as outsourcing within its home country or
consolidating business operations.
One might wonder whether IT is still a good career choice for students and
workers in countries that offshore software and IT services work. Despite all the
publicity in the United States about jobs being lost to India and China, the size of the
IT employment market in the United States today is higher than it was at the height
of the dot-com boom. Information technology, aggregated across all industry
sectors, is likely to be a growth area at least for the coming decade, and the US
government projects that several IT occupations will be among the fastest growing
occupations during this time. There are some things that students and workers in
this field should do to prepare themselves for the globalized workplace. They should
get a good education that will serve as a firm grounding for understanding the
rapidly changing field of IT. They should expect to participate in life-long learning,
which means learning intensively in the workplace as well as more formal kinds of
education and training. They should hone their “soft skills” involving communication,
management, and teamwork. They should prepare to become familiar with an
application-specific domains in particular industries, especially in a growth fields such
as health care, in addition to core technical computing skills. They should learn
about the technologies and management issues that underlie the globalization of
software, such as standard technology platforms, methods for re-using software, and
tools and project management for geographically distributed work.
2. The Economics of Offshoring
Much of the economic debate about offshoring centers around whether the theory
of comparative advantage applies to the offshoring of software and IT services.
Economists have argued on both sides of the issue. The arguments are sophisticated
and nuanced, and the results often depend on whether the underlying assumptions
hold in the current context. While a majority of economists believe that free trade
“lifts all boats” equally, the underlying question is an empirical one and can be
answered by analyzing reliable data when it becomes available.
The theory of comparative advantage states that if each country specializes in the
production of goods where it has a comparative (relative) advantage, both countries
can enjoy greater total consumption and well-being in aggregate by trading with
each other. Offshoring enables, for example, US firms to lower costs and save scarce
resources for activities in which they have a relative advantage, while offshoring has
led to significant employment and wage gains for Indian workers and rapid profit and
revenue increases for Indian businesses.
What the theory of comparative advantage does not mean is that all members of
society will benefit from trade. In general, imports of an “input” have economic
effects that are similar to those of an increase in the supply of the input, namely,
lower returns to the suppliers of the input, lower costs of production, and lower
prices for consumers. If the input were a service, the wages and salaries of those
producing the service would fall, but so also would costs for firms that are buyers of
the service. In the exporting country, the opposite effects hold. That is, the returns
to the owners or suppliers of the service or input increase and the wages of the
employees at the service providers increase due to the higher demand.
Economists believe that trade generally leads to significant benefits for the trading
countries. These gains are not inconsistent with employment losses in specific
sectors that will cause economic pain to the workers affected. To achieve an
equitable result, many analysts believe that it is important to establish a safety net
that provides income and training opportunities to affected workers. Components of
the safety net might include extended unemployment benefits, wage insurance, and
A key assumption underlying the theory of comparative advantage is that the
economy enjoys full employment. Thus, this theory is best thought of as a theory of
the long-term, in which workers displaced by imports or offshoring find work in other
sectors. By contrast, most popular discussions of the offshoring phenomenon tend to
focus on questions such as “where will the new jobs be created” and “can the
workers be retrained for these new jobs”. In general, peering into the crystal ball to
predict where and what types of new jobs will be created is both difficult and
unrewarding. A dynamic economy such as that of the United States creates and
destroys millions of new jobs in response to changes in tastes, and more importantly
in response to innovations and advances in technology. There is no guarantee that
the economy will continue to create these new jobs, but policy makers can take
some comfort from the historical evidence that thus far it has managed to do so. The
key to job creation is of course the ability of the economy to rapidly generate and
adopt innovations—new types of goods and services, and productivity-enhancing
In general, trade stimulates innovation and economic growth in both trading
partners. Some, such as Ralph Gomory and William Baumol, have argued that
completely free trade, can create new possible conflicts of interest between trading
partners. For example, insofar as offshoring stimulates, in countries such as China,
innovation and productivity growth in goods and services where developed countries
such as the United States enjoy a comparative advantage, this will cause the “terms
of trade” to become less favorable over time for the United States. In other words,
even if free trade is the best policy, it may well be that free trade, by stimulating
innovation overseas, may impose long-term losses. However, Gomory and Baumol’s
analysis shows that this conflict of interest (deriving from unequal benefits of free
trade) is most pronounced when the two trading partners are at similar stages of
development. Since most offshoring involves countries at very different levels of
development, this conflict of interest is still in the future.
In the IT services sector, there is a related concern. Currently, it is efficient to
offshore “low-end” IT services, such as coding or maintenance, to a low-wage
country while “high-end” activities, such as requirements analysis, design, and R&D,
remain in the high-wage country. The concern is, however, that eventually the high-
end IT activities would also move offshore. Were this to happen, the current
technology leaders (United States, Germany, Japan, United Kingdom, et al.) may
relinquish that leadership role. There is some anecdotal evidence that some IT
process innovations are moving to low-wage, offshoring operations.
Most economists, however, argue that current technology leaders will not lose
their technological leadership position. Even if production moves to other countries,
history shows that in many industries the locus of production and the locus of
invention are physically separated. There are two key resources required to remain
at the center of innovation in software: access to talented designers, software
engineers, and programmers; and proximity to a number of large and technically
sophisticated users. Current technology leaders, and the United States in particular,
currently dominate on both counts. More broadly, the United States has other
important capabilities, including the best universities and research institutions, highly
efficient capital markets, flexible labor markets, the largest consumer market,
business-friendly immigration laws, and a large and deep managerial talent pool. As
a result, the evolution of business in the United States has followed a consistent
pattern: launch innovative businesses here, grow the business, and as products and
services mature migrate lower-value-added components and intermediate services
over time to lower-cost countries. Nevertheless, there are those who argue that
globalization will diminish the comparative advantage of current technology leaders,
which may lead to the loss of their current dominant position and create a long
period of adjustment for their workers.
Data on current and future trends of offshoring leave much to be desired. First, the
definitions of offshoring vary from one study to another, making it hard to compare
statistics. For example, some studies count all service jobs, some count IT jobs,
some include IT-enabled jobs, and some are simply not precise about what they are
counting. Second, there is a question of what metric to use in measuring the extent
and trends in offshoring. One might measure, for example, jobs lost in the developed
country, jobs in the developing country’s IT industry, or dollar value of business
outsourced. In the case of each of these metrics, however, it is either difficult to
make the measurement or the metric is not directly enough relevant to the
offshoring situation. For example, it is difficult to calculate dollar value of business
offshored because these are internal transfer costs for multinationals, which they
may not be willing to report or do not report in an appropriately disaggregated way.
Projections of future trends are more suspect than data on the current situation.
One type of projection identifies types of jobs that are vulnerable to offshoring.
These vulnerability projections provide at best a high upper bound on expected job
loss, and for this reason they are blunt policy-making tools. It may be that routine
programming jobs are vulnerable to offshoring, but it is highly unlikely that every
last one of them will be lost to offshoring. Moreover, even in cases where the
methodology is sound and soundly applied, projections of any kind about the future
are much less likely to be accurate than data about today’s or yesterday’s situation
since it is difficult to predict all the factors that will come into effect over time.
Another important issue to consider is the source of the data. Data from the United
States and many other national governments tends in general to be reliable. The US
government, however, collects data to handle established policy issues. If a new
phenomenon arises, the existing data sets may not be well suited to studying the
new policy issue. This is the case with offshoring. US data on job layoffs and on
service trade are both designed for other purposes, and there is widespread belief
among economists that both seriously undercount offshoring trends. Data collected
and analyzed by trade associations and consulting firms may be very useful, but
there is skepticism in the economic community about the quality of these data in
many cases because the methods for collecting and analyzing the data are often not
made available for scrutiny, the data they collect (from members of their
organization) may not be a representative sample of society as a whole, and these
organizations have particular objectives in mind that they hope their data will
The United States is the source of the greatest number of offshored jobs and
where the phenomenon has received the greatest attention. But even for the US, it is
difficult to be certain of the extent of offshoring. Federal data is not very helpful, and
most of the existing data comes from consulting firms. The numbers generally
indicate that 12 to 14 million jobs in the United States are vulnerable to relocation
through offshoring, and that annual losses have ranged from under 200,000 to about
300,000 service jobs from the United States to offshoring. The number of IT jobs is
somewhat lower than these estimates because these estimates include service jobs
such as working in call centers and sometimes other IT-enabled services such as
business process and knowledge process offshoring. Importantly, these estimates do
not include newly created jobs. The consensus seems to be that about 20% of US
companies are currently offshoring work but that the percentage is rising. The
current value of offshoring contracts from the United States seems to be in the $10
to 20 billion range, with an expectation of rapid growth. It should be remembered,
however, that we do not know the methods used to arrive at these numbers and how
independent the data from one consulting firm’s study is from that of another.
Statistics for the entire world or for other individual countries are even harder to
come by and more suspect than those for the United States. The annual dollar value
of worldwide offshoring trade for recent years has been estimated to be between
$1.3 billion and $32 billion, depending on whether certain exported products are
counted and whether the numbers for multinational companies are included. An
estimated 30% of the world’s largest 1000 firms are offshoring work. Europe has
lower levels of offshoring than the United States. It is estimated that only 5% of
European businesses (of all sizes) are offshoring, and at most 2 to 3% of European
IT workers will lose their jobs to offshoring by 2015. The United Kingdom has the
highest rate of work sent offshore of any European nation, with an estimated 61% of
firms now offshoring. In Germany, only 15% of companies are now offshoring, and
perhaps a total of 50,000 German jobs have been lost to offshoring so far; however,
there seems to be an increase in German offshoring in the recent past. Statistics
about India show a vibrant IT industry, with annual growth of 20 to 30%, the vast
majority of the growth coming in the export rather than the domestic market. Data
on the rest of the world are too spotty to trust.
3. Understanding Offshoring from a National Perspective
The first countries to develop software industries primarily for export rather than
domestic purposes were Ireland and Israel. The big player to come in a little later
was India, beginning in the mid-1970s and growing rapidly from the late 1990s. To
some degree, a global division of labor is beginning to form: India serving the
English-speaking world, Eastern Europe and Russia serving Western Europe, and
China serving Japan. But India is also providing service to Western Europe, and
China provides service to the United States. In addition, there are many smaller
supplier countries. The greatest attention is given in this report to the United States
and India, the two biggest players.
The United States has historically dominated and continues to dominate the
software and services industry, with about 80% of global revenue. It is highly
dominant in the packaged services industry, with 16 of the top 20 companies
worldwide, and slightly less commanding but still dominant in the software services
sector, with 11 of the top 20 companies. This dominance is due to a number of
factors, including a legacy of government funding of R&D, computer science research
in the open US higher education system, a skilled workforce created by a strong
university system, a culture of risk taking and the capital to finance risks, early
adoption by sophisticated users, the world’s largest economy and market, and
leading semiconductor and data storage industries that helped to spread the use of
The centrality and dominance of the US industry has been a given during the past
five decades. What is emerging is the globalization of the software and software
services industry. This creates opportunities around the world for people and
companies in both developed and developing countries to participate in this
profitable industry. It also creates challenges for the former leaders, notably the
United States, Western Europe, and Japan.
Software services is India’s largest export. As a large developing nation, India
faces many challenges, including high rates of poverty, corruption, and illiteracy; a
substandard infrastructure; excess government regulation; and various other
problems typical of a poor nation. These challenges are offset by a number of
strengths, especially for software and services production. It has a long history of
developing capable mathematicians. India is unique because of the large number of
individuals with adequate English language capability, and also for the large cadre of
Indian managerial and technical professionals working in North American and, to a
lesser degree, in European high-technology occupations and organizations. For those
who can afford it, India has a strong and highly competitive K-12 educational system
emphasizing science and mathematics. Despite its democratic socialist tradition that
involved large amounts of bureaucracy and state regulation, it has been a market
economy and has a history of managerial education and competence. These assets
have given India many advantages in establishing a software export industry.
India’s software export industry began in 1974, when it began sending
programmers to the United States to do work for the Burroughs Corporation. Political
liberalizations related to trade in the 1970s and again in the early 1990s helped to
support the development of the Indian software industry. Offering solutions to the
Y2K problem helped the industry to grow substantially. The industry expanded
beginning in the late 1990s, first by bringing back to India much of the software
development, maintenance, and testing work it had previously done on the client’s
premises, then developing export businesses in business process offshoring, call
centers, and research and development. India is moving up the value chain and is
seeking people with considerably more skill than low-level programmers to do these
higher value jobs. Software and service export firms in India are growing at 20 to
25% per year according to the best statistics available, and each of the three leading
Indian software firms (Infosys, TCS, and Wipro) already employs over 40,000
India is likely to continue to grow its software industry in scale, scope, and value-
added. There is little reason to believe that offshoring as a process will end in the
foreseeable future, but it could slow down. The enormous investment by leading
software multinationals will expand the number of Indian project managers with
strong managerial skills. This, together with the relocation of portions of startup
firms to India, is likely to result in greater levels of entrepreneurship and lead to
firms able to sell their skills on the global market. The offshoring of IT services and
software for export will dominate the near future of the Indian software industry.
There are several possible trajectories. Custom projects could become more complex
and large, leading Indian software professionals to move from programming into
systems integration and systems specification and design. The average size of
projects Indian firms are undertaking has already grown from 5 person-years in
1991 to 20 person-years in 2003. As multinationals deepen their Indian operations,
domain skills are developing in India and some other nations, so that managed
services are likely to become more important; this will match global trends in the
outsourcing of applications management and business processes.
Despite the fact that India’s software production for the US market exceeds that
of any other nation, it holds only a small share of the global market for all software
value-added. The only part of the software value chain in which India has made
substantial inroads is in applications development, where it has captured 16.4
percent of the world market. But applications development is only approximately 5
percent of the entire global software services market. This implies that there is much
room for growth. In order to grow, the Indian industry will have to shift to more
complex activities by securing larger projects, undertaking engineering services,
integrating and managing services, or bidding on projects that include transforming a
client’s entire work process. India, however, will have some difficulty achieving this
growth unless it strengthens its R&D capability.
Software offshoring to India is likely to grow, not only through the continued
growth of indigenous Indian firms, but also because foreign software firms are
increasing their employment in India in product development and particularly in
software services. Competition is likely to grow between multinationals based in
developed countries, such as Accenture, IBM, and Siemens Business Services, and
the large Indian firms, such as HCL, Infosys, TCS, and Wipro, as the Indian
companies expand their global reach and the multinationals expand their operations
in low-cost countries. The Indian subsidiaries of multinationals play an important role
in the development of India’s software capabilities, because they are more willing to
undertake high value-added activities, such as software product development, within
their own subsidiary in India than they are to send the work to an Indian
For at least the medium term, India should be able to retain its position of primacy
for software offshoring from the English-language world. In the longer term, unless
India makes an even greater effort to upgrade its universities and the technical
capabilities of its graduates, China may become an important alternative destination.
China’s software and services industry does not currently have a major impact on
the world economy. The industry is highly fragmented into many small companies,
few of which are large enough to take on large projects for developed nations. The
hardware industry is well established in China, and in the future it may drive the
software industry to a focus on embedded software. Unlike India, where the
multinationals are focused mainly on serving the world market, in China
multinationals are more focused on positioning themselves to serve the enormous,
emerging domestic Chinese market.
Japan has the second largest software and services industry in the world, after the
United States; and it is the fastest growing industry in Japan. Japan makes games
software and custom software for the world market and packaged software for its
domestic market. It imports a significant amount of systems and applications
software from the United States; and it calls on China and India to provide custom
There are three typical patterns of Japanese offshoring. Most commonly, a
Japanese firm will identify a need for custom software, contract with a Japanese IT
company to provide the software, and the IT company will in turn contract with a
Japanese subsidiary of a Chinese firm to do the programming work. This
programming used to be done almost exclusively in Japan, but as the cost of locating
Chinese workers in Japan has become expensive, more and more of the
programming is being done in China. A second approach that is more recent is for
Japanese firms to invest in China to form wholly owned subsidiaries or joint ventures
with Chinese firms. A third approach is for multinational corporations to move
programming and back-office functions of their Japanese subsidiaries to lower-cost
locations, often in China. The Dalian software park in China is growing rapidly as a
result of this emerging Japanese business. The amount of offshoring from Japan is
still small, but cost pressures are likely to cause it to increase; and since Japan has
such a large software industry, the opportunities for offshoring are considerable.
The European Union represents the second largest market in the world for
software and IT services, after the United States. There are many differences,
however, from country to country, and the European Union cannot be viewed as a
unified, homogeneous market. The European software industry and employment
patterns are different from those of the United States, with much more software
production done in-house and embedded in physical products. This does not prevent
offshoring, and certainly many leading European industrial firms are establishing
offshore facilities to produce embedded software. Much of this employment is
subsumed under R&D and other activities such as application-specific integrated
About two-thirds of the work offshored from Europe is offshored by the United
Kingdom. Continental European firms continue to lag UK firms in sending software
work across their borders. The Germanic and Nordic nations have only recently
begun to build offshore software and software service delivery capabilities, but firms
with global practices such as SAP, Siemens, and others are moving rapidly to build
their offshore capabilities in Eastern Europe, China, and India. The geography of
European offshoring will be somewhat different from that of the United States in that
Nordic and Germanic firms will use Eastern Europe and Russia in addition to India.
Latin (Romance-language-speaking) Europe has been slower to begin offshoring, but
now its major firms are sending work to Romania, Francophone Africa (particularly
Morocco), and Latin America in addition to India. Despite these geographical
differences, there is no reason to believe that the pressures to offshore software-
related work will be substantially different than in the Anglophone nations. In part
this is because the US-based multinationals with strong global delivery capabilities,
such as Accenture, EDS, Hewlett-Packard, and IBM, are present and competitive in
all European markets. European firms may continue to experience a lag due to union
and government opposition to offshoring, but their cost and delivery pressures are
similar to those experienced by US firms.
In Russia, software was a relatively neglected field during the Soviet era, but in
the 1990s as the country transitioned to a market economy, many scientists and
engineers moved from low-paid government and university positions into
entrepreneurial firms and Russian subsidiaries of multinationals; and some of these
people entered the software field. So far there are relatively few programmers.
Wages are low. Technical skill level is high, but there is little project management
experience. Software firms are typically small, not able to take on large international
software integration projects. Nevertheless, the high skill level of the Russian
research community, a legacy of its Soviet history, has led Intel and a few other
multinationals including Boeing, Motorola, Nortel, and Sun to open R&D facilities in
4. Understanding Offshoring from a Company Perspective
Instead of examining offshoring by country, it is also possible to examine
offshoring by the type of company. We will consider five types of firms. The first are
large, established software firms headquartered in developed nations that make and
sell packaged software. Examples include Adobe, Microsoft, and Oracle. As a general
rule, the largest and most successful packaged software firms are headquartered in
the United States; the notable exception is SAP in Germany.
Most large packaged software firms have global operations. In many cases, their
offshore operations are for localization work for the local domestic market. However,
particularly in the case of India, and also to some degree in Russia, the work is for
development of their worldwide software packages. Locating in these low-wage
countries enables these firms to have access to lower-cost programmers, many of
whom are comparable in skill levels to the company’s workers in the developed
nations. This is not the only benefit. Having operations in other time zones can speed
up production by facilitating round-the-clock production. These opportunities are
encouraging major packaged software firms to expand their workforce in India and
other lower-cost nations.
Offshoring will have a complicated effect on the packaged software firms. First, it
might and likely will put employment pressure on developed nation software firms to
decrease employment in the developed nations. On the other hand, the lower cost
and faster production could allow the development of new features in old software
and could contribute to the creation of new, well-priced software products, which
would in turn increase income for these firms and perhaps lead to greater hiring.
Next we consider large, established software firms headquartered in developed
nations that are large providers of software services. These companies may also
provide packaged software, though not all of them do so. Examples include
Accenture, EDS, and IBM. Software service firms have been among the fastest
growing firms in the IT sector, and in general they are far larger than the packaged
software firms. Firms coming from the software side (e.g., Hewlett Packard or IBM)
and from the service side (e.g., Accenture) are converging. In the case of IBM, this
has been through both direct hiring and its recent acquisition of the Indian service
firm Daksh (with its approximately 6,000 employees). Hewlett Packard has built its
global non-IT services to over 4,000 persons in the last three years, largely through
Software services is in most respects a headcount and labor-cost business; these
companies grow their revenues by hiring more persons. The multinational software
services firms have been experiencing increasing pressure on costs due to
competition from developing nation producers, particularly from the Indian service
giants such as Infosys, TCS, and Wipro. This has forced the multinationals
themselves to secure lower-cost offshore labor. Service firms such as Accenture,
ACS, EDS, IBM, and Siemens Business Services operate globally, but only in the last
five years have they found it necessary to have major operations in developing
nations to decrease their labor costs. Today, the larger service firms, including
Accenture and IBM, are rapidly increasing their headcount in a number of developing
nations, particularly India. At the same time, these firms are holding steady on their
developed nation headcount or gradually drawing it down. Given the ferocious
competition in software services, there is little possibility that prices will increase
substantially. This suggests that, for the large multinationals, the offshoring of
services will continue to increase in both absolute numbers and percentages of their
Next we consider firms headquartered in developed nations that have software
operations but are not part of the software industry sector. This is the enormous and
eclectic group of companies that provide all the non-IT goods and services in the
economy. Software is now at the heart of value creation in nearly every firm, from
financial firms such as Citibank, to manufacturing firms such as General Motors.
Customizing, maintaining, and updating IT systems has become an increasingly
significant expenditure for businesses in developed countries, and thus firms are
actively trying to lower these cost. One way to lower them is to offshore the work to
nations with lower labor costs.
It is difficult to estimate the amount of software work that is offshored by these
companies. Businesses often do not break out this particular kind of expense, and if
work is transferred to an overseas subsidiary, this is considered an internal transfer
and may not be reported at all. However, it is clear who does the work. If it is not an
overseas subsidiary of the company, then it is likely to be one of two other kinds of
firms that provides the service: a large service firm from a developed nation (e.g.,
Accenture, CapGemini, IBM, and Siemens Business Services) or a firm from a
developing nation (e.g. Infosys or TCS in India, Luxoft in Russia, or Softech in
It is not certain whether offshoring will lead to a decline in the number of software
service employees employed in the developed nations. In the current economic
recovery, existing firm headcount throughout the IT sector in the United States
appears to be stagnant. In other sectors, limited data are available. For example, in
financial services it is unknown as to whether the increasing headcount in developing
nations has had any impact on employment in the developed nations. The most that
can be said is that non-IT firms are increasing their IT employment in developing
nations to serve the global market, and this trend is underway across many different
firms, including industrial firms such as General Electric and General Motors.
Next we consider software-intensive small firms, particularly startups, based in
developed nations. For small startups, offshoring is often a difficult decision,
although more recently a number of firms in the United States have been established
with the express purpose of leveraging lower cost offshore skilled engineers. For
many smaller firms, an offshore facility can be demanding on management time.
This is especially true in India because hiring and retaining highly skilled individuals
is difficult. The protection of intellectual property, which is typically the most
important asset that a technology startup has, is problematic in India and especially
China. There is substantial anecdotal evidence that, despite these challenges, under
the pressure from their venture capital backers and the need to conserve funds,
small startups are establishing subsidiaries abroad, particularly in India, to lower the
cost and increase the speed of software development.
A pattern is emerging for US startups. They may initially use outsourcing to, say,
an Indian firm as a strategy, but many soon establish a subsidiary in place of the
Indian firm. They do this for a variety of reasons, including worries about intellectual
property protection, control of the labor force, and management efficiency. The
minimum size of an offshored operation is reportedly as few as 10 persons. If this
report is accurate, then it may be possible for many more small firms to establish
subsidiaries in developing nations than have done this so far. Unfortunately, data on
the scale and scope of offshoring by startups are unavailable.
It is tempting to view offshoring by startups (whether to an Indian firm, say, or to
their own overseas subsidiary) as an unmitigated loss of jobs for US workers.
Nevertheless, the real situation is more complicated. Lowering the cost of
undertaking a startup could mean that the barriers to entry are lowered, thus
encouraging greater entrepreneurship. The jobs created by this entrepreneurship
should be counted against those lost by offshoring. So, correctly estimating
employment net effect of offshoring in the case of startups is very difficult.
Finally, we consider firms in developing nations providing software services to
firms in the developed nations. The availability of capable software programmers in
developing nations provided an opportunity for entrepreneurs and existing firms to
offer programming services on the global market. It was in India where this practice
first began in a significant way. Because telecommunications links were not so
sophisticated, the Indian programmers initially were placed in the US customer’s
premises. This practice was profitable and gradually expanded to include remote
provision of services – often to do Y2K work—when telecommunication improved and
demand heated up in the late 1990s. These developments created an environment
within which major corporations were willing to experiment with overseas vendors,
and a sufficient number of these experiments were satisfactory. The result was that
offshore vendors, particularly Indian firms, were validated as candidates for
software-related projects. These projects also allowed offshore vendors, again
particularly Indian firms, to grow in headcount, experience, and financial resources,
so that they could undertake larger and more complicated projects.
Software services firms from a number of the developing nations have become
players in the global economy. The large Indian firms (HCL, Infosys, Satyam, TCS,
and Wipro) are at present the global leaders. However, in China, Mexico, and Russia
there are growing software service firms that employ between 1,000 and 5,000
people. Currently, the firms from other nations are not large enough to compete with
either the multinationals headquartered in developed nations or the large Indian
firms. Medium-sized firms in other geographies can, however, reduce the risk for
customers of having all their offshore work done in one country, where it might be
interrupted by a natural disaster or by political or military problems. The larger
multinationals and Indian firms are also establishing facilities in other geographies,
particularly Eastern Europe and, more recently, Mexico.
Firms are leading a global restructuring of the geography of software and software
services production. They are experimenting with a variety of strategies meant to
utilize workers that have become available in the global economy. This is true of
software product firms as well as multinational and developing-nation software
service providers. The impact of firms outside the IT sector with large internal
software operations transferring some of the software operations to lower-cost
environments has been less remarked upon; however, should the current trend
continue, this will have a substantial effect on IT employment. These firms have
already relocated a significant amount of work from high-cost to lower-cost
environments, and this process appears likely to continue, and possibly accelerate,
as firms become more comfortable working in developing nations. The offshoring of
startup employment bears particular observation because the US high-technology
economy in particular is dependent upon the employment growth that small startups
5. The Globalization of Research
IT research is concentrated in only a few countries. About a third of computer
science papers come from the United States alone. A few additional traditional
centers of concentration of IT research (Australia, Canada, France, Germany, Israel,
Italy, the Netherlands, Sweden, Switzerland, and the United Kingdom) account for
about another third.
This is not surprising considering the large part of world Gross Domestic Product
(GDP) concentrated in these same countries. There is a correlation between
Purchasing Power Parity (PPP) Adjusted Gross Domestic Product and computer
science publication. However, the share of computer science paper production by
scientists in the traditional centers of concentration of IT research is more than 60%
greater than their share of world PPP GDP (65% vs 40%). In contrast, Brazil, China,
India, Indonesia, Mexico, and Russia together account for 27% of world PPP GDP,
but only 7% of computer science paper production.
IT research was even more concentrated in the past than it is today. The initial
bloom of IT research occurred in a few select locations in the United States and a few
other countries in the aftermath of the Second World War. This concentration has
been perpetuated by the natural tendency of strength to build on strength.
Particularly in the United States, this bloom was driven by ample government
funding and a significant migration of scientific talent from the rest of the world. In
fact, there is little doubt that government funding has played an important role in
most countries. For example, on a per capita basis government funding is
significantly larger in Sweden and Israel than in the United States. The pattern of
strength in only few countries is amplified by a general migration of scientists from
countries that do not support graduate education and research to countries that do.
Research-driven innovation is seen by many countries as a way to increase
national wealth and standard of living. Both developed and developing countries are
attempting to build up or shore up their research capabilities. This means greater
competition among nations in the research area, and in particular competition for
talent. Until recently, the United States had won the research talent competition, but
that situation is changing. Due to strong efforts to foster research on the part of a
number of national and local governments outside the traditional centers of research,
IT research is slowly but steadily, and almost certainly inevitably, becoming more
global. This globalization of IT research has been accompanied by a significant
increase in the production of PhDs outside the traditional centers of concentration,
and a reduction in the migration of researchers to these centers. In the long run,
there is no obvious reason why IT research should be any more concentrated than
world economic activity in general.
Globalization allows more and better people to participate in IT research.
Increasing educational opportunities around the world means that more people are
able to realize their research potential, thereby increasing the size of the IT
researcher pool and the quality of the best researchers. A freer worldwide market in
research means that potential funding for IT research can more easily be targeted to
those that can most effectively and efficiently create research results. Both of these
trends increase the amount of scientific advance that can be obtained from a given
level of resources. There is little doubt that this is good for the field of IT and for the
world as a whole; however, while we gain as a group, localities and individuals may
end up suffering losses.
Globalization provides improved opportunities for people who live outside the
traditional centers of concentration of IT research. It also provides improved
opportunities for the best researchers, due to increased global competition for their
services. It may, however, limit opportunities for other researchers in the traditional
centers of concentration, for whom global competition may mean declining wages or
even the loss of jobs.
6. Risks and Exposures
Businesses that make offshoring and outsourcing decisions increase their own
exposures to risk, and at the same time potentially create additional risks and
exposures at many other levels, all the way from individuals to nation-states. Many
of these other communities of interest have scant awareness that they are being
exposed. For every risk of privacy invasion into an employee database that an
employer might fear, data about ordinary citizens is exposed to tens of risks. Bank
records, transaction records, call center traffic, and service centers are all offshored
today. Voluminous medical records are being transferred offshore, read by clinicians
elsewhere, stored and manipulated in foreign repositories, and managed under much
less restrictive laws about privacy and security than in most developed countries.
The higher exposure to terrorist incursion, sabotage, or extortion attempts has not
received wide discussion by companies employing offshore labor.
A basic principle of security is that the longer the supply chain and lines of
communication, the more opportunity there is to attack them. The inherent
difficulties in international data communications are compounded by jurisdictional
issues regarding regulation and legal responsibility. Offshoring risks include data
communications vulnerabilities, loss of control of business processes, loss of control
over network perimeters, increased network complexity, clashing security policies
and procedures, gaps in personnel security, and drastically diminished ability to
know about and respond to security breaches.
What seems particularly lacking within many procuring companies is an overall line
of authority and responsibility for primary data records as they pass through one,
two, or more subsequent offshore companies that perform work on the data set or
perform operational tasks for one purpose or another. Such “hands-off” management
responsibility cannot be presumed to work in the best interests of anyone concerned
with risk attenuation.
Risks turn into incidents through two basic kinds of action—accidents and
intentional acts. The vast majority of incidents that can be anticipated originate with
threat actors: rogue employees, hackers, criminals, organized crime syndicates,
industrial espionage, unfriendly nation-states, and terrorists. Effective risk
management strategies include security due diligence, business due diligence, active
risk management, and third party auditing.
Commercial risk from offshoring is multi-faceted and different from security risk.
Business issues are primarily operational—concerning productivity, efficiency, and
quality. Business managers everywhere struggle with costs, delivery times, and
product quality. Geographic and cultural spread can adversely affect the latter two
even as costs seem to be reduced. Communication paths become longer and more
convoluted; they are more apt to suffer distortion and error from language and
cultural difference. Supply chain networks become more diverse, less centralized,
and hence less controlled. Protection from manufacturing sabotage and theft
becomes more difficult because of the breadth of the system. Intellectual property
protection becomes more porous as the infrastructure expands on an international
scale. Legal barriers and costs increase as companies cross international boundaries,
due to conflicting regulations, procedures, and practices. Safety issues are
exacerbated by decentralized operational logistics.
The most contentious and perhaps most challenging aspect of offshoring is its risk
impact on individuals. Individuals are often pawns in this global restructuring of
business. They are at risk of loss of privacy, loss of jobs, loss of property through
identity theft and credit card fraud, and loss of security. Moreover, they have little
say in these business decisions and little they can do to protect themselves.
Offshoring adds threats and vulnerabilities that do not exist in domestic
outsourcing, and increases vulnerabilities that exist in all inter-network commerce.
Multiple legal jurisdictions add new risks. Distance adds complexity and vulnerability
because cyber-space is actually a complex of real-world service providers in distinct
jurisdictions with varying cultures, all under cost pressures. A company acting under
a business culture not easily known to clients cannot be assumed to be exercising all
the same precautions that might be common practice in the client business’s
country. As more and more countries provide offshore services, the price pressures
on providers of outsourced services increase. With increased price pressures, the
temptation to skimp on security measures gets stronger.
There are a number of steps that can be taken for protection. Data that is being
transmitted should be encrypted. Offshoring providers should be vetted carefully.
Companies should have security and data privacy plans and be certified to meet
certain standards. Service providers should not outsource work without the explicit
approval of the client. Mass export of databases should not be permitted. Data
should be accessed one record at a time and on a need-to-access basis. The
database should be encrypted. Certain types of data should not be allowed to be
exported across national boundaries.
Offshoring can also place national security at risk by threatening both military and
critical infrastructure operations. For example, the United States and other countries’
IT-based military systems have adopted COTS (Commercial Off-The-Shelf) product
purchasing strategies, shared national and international commercial infrastructures,
and Internet Protocol technologies to facilitate network-centric warfare systems. It is
more difficult for the buyer to gain insight into source and application code
documentation for COTS products, especially if the providing companies are offshore.
Many COTS components and sometimes whole systems are developed and
maintained by providing companies, which may themselves procure development
and services from other nations with privacy, intellectual property rights, security,
diplomatic, and defense policies possibly at odds with the original procuring country.
Thus, a COTS strategy increases the possibility of a hostile nation or non-government
hostile agents (terrorist/criminal) being able to compromise the system or services.
Attacks can cause malfunction and destruction of critical infrastructure such as
transportation, power, and financial systems, and loss of citizen confidence in their
infrastructure and government.
The offshoring of homeland security technology development and management
systems that send vital information such as biometrics, identification codes, tax and
personal information overseas are of critical concern. Until better controls of this
information are developed, this presents a risk to all nations. Further research in
methods to secure this data and the development of nation-to-nation and
international treatment of both the data and how compromises will be handled is
Globalization is here to stay and so are its international effects. National security
and social effects can never be completely mitigated, but country-specific and
international strategies can be put in place. Problems cannot be solved until they are
defined and accepted as valid by a sovereign entity and its citizens. Topics needing
national attention include legislation, international agreements, policing, tariffs,
Internet policies, and more equitable tax-structure strategies for companies investing
at home. Other topics needing public attention include more formal government-
commercial agreements and funded research to address data protection and
communications between stakeholders involved in homeland defense and critical
7. Education in Light of Offshoring
Offshoring creates major changes in the demand for workers. Some countries need
more workers, others fewer. Offshoring also causes the set of skills and knowledge of
workers to change. Education is a tool that enables a country to provide the skilled
workers that it needs, and thus it can be the centerpiece of a national policy on
offshoring. Developing countries that are building up their software service export
markets, such as India and China, need to prepare growing numbers of people to
work in this industry. The developed countries are facing questions about how to
revise their educational systems to prepare their citizens for the jobs that will remain
when other jobs have moved to lower-wage countries. These developed countries
also have to find ways of making their education system serve to increase the
technological innovation that has historically driven productivity gains, new
employment, and new wealth for nations.
The United States has a well-established and complex IT educational system. The
bachelor’s degree is the primary degree for people entering a computing career.
While degree programs appear under many names, five majors cover most of the
programs: computer science, computer engineering, software engineering,
information systems, and information technology. Although there are some
differences among these five types of programs, they are many similarities in
providing foundational knowledge related to computer programming, the possibilities
and limitations of computers, how computers and computing work in certain real
world applications, various skills about communication and teamwork, and other
In addition to the five traditional kinds of departments, a variety of new academic
units related to computing and information technology have begun to emerge in US
universities. These include schools and colleges of computing that typically include
the degree programs in computer science as one component, new schools that are
separate from computer science and information science programs that fill an
additional need in the computing and information technology space, information
schools that in almost all cases evolved from library schools, and campus-wide
multidisciplinary information technology institutes aimed at fostering collaboration of
faculty and students across departments. While they are not the programs intended
to produce ace programmers or deep technical experts, the mix of skills and
perspectives is a reasonable educational experiment to try to produce students well
suited for higher-value-added jobs. There is also rapid growth in degree programs
offered by for-profit universities, which provide a convenient entry to the profession
for working adults.
Non-degree programs also play an important role in US IT education. They include
certificate programs, non-degree courses offered by traditional colleges and for-profit
organizations, training associated with specific technologies, and corporate training
programs. These alternative kinds of training programs appear to be growing rapidly,
but it is difficult to quantify their extent or growth. There are many different goals
being sought through enrollment in these non-traditional programs: training for a
specific IT career, career advancement within the IT field, move from a non-
professional to professional IT job, continuing education to keep technical skills
current, or gaining specific product information or usage skills. There is also training
provided by corporate universities for employees, customers, and suppliers, which
might include technical training, background information about the company or its
industry, or core competencies such as learning skills, communication and
collaboration, creative thinking and problem solving, global leadership, or career self-
Recent changes in Europe, under the Bologna Declaration, have the goal of
unifying the European educational system along the lines of American system of
separate bachelor and master degrees. The Bologna process provides a standardized
sequencing of degree programs, makes it less time consuming to obtain the first
undergraduate degree, and makes the system more open for students who received
their baccalaureate degrees in developing nations to enter masters programs without
having to repeat some of their earlier training. The Bologna initiative has stimulated
new interdisciplinary and specialized studies in computing within European
universities, especially those incorporating domain-specific knowledge such as
bioinformatics and media-informatics, and has also created separate programs in
software engineering and telecommunications. The increasing uniformity of IT
education across Europe will provide additional incentive for offshoring work from
higher to lower wage countries within Europe; in the long run it may lead to a
leveling of IT wages across Europe.
The German model is particularly important since the German-speaking nations
represent approximately a quarter of the European population. There are some
major voices in Germany in opposition to the Bologna initiative. For example, the T9
initiative, by the nine largest and leading technical universities in Germany, argues
that the traditional model of university education leading to a diploma after nine
semesters has considerable advantages over the system that leads to separate
bachelor’s and master’s degree. It is unclear whether this will lead to modifications in
the Bologna model over time.
India, as the largest supplier of exported software services, faces a different set of
educational challenges from the United States or Europe, namely to ramp up its
higher education system to staff its rapidly expanding software industry. Soon after
India achieved its independence in 1947, a decision was made to invest a greater
amount in higher education than is typical for a developing nation, even though
there was not enough money to finance primary education for all. This decision was
taken in part to support the efforts to build an educated workforce for the heavy
industry that India’s leaders envisioned would provide an important part of its
revenue base. The investment in higher education was advantageous to India when
it opened up its markets and began to participate more extensively in global trade in
the early 1990s. There have been many competing claims on government funds, and
the central government has not been able to keep up with the increasing demand for
higher education. Policies were liberalized in the early 1990s, allowing the formation
of new private institutions of higher learning, resulting in the rapid development of
private postsecondary education. Whereas only 15% of engineering seats in
university had been at private institutions in 1960, 86% are private today. The rapid
advancement of the private university system has created some problems. Quality
varies widely, from clearly substandard to the highest international quality, and the
government has not established, much less enforced quality standards. Some
Indians also object to the high tuition and fees as being counter to the equal access
goals of the nation.
Today the higher education system in India is extensive and rapidly expanding. It
currently includes more than 300 universities, 15,000 colleges, and 5,000 training
institutions. Nevertheless, only 6% of the college-age (18-23 year old) population is
enrolled in college or university. Some of the schools, such as the Indian Institutes of
Technology and the Indian Institutes of Management are world-class; but the quality
falls off rapidly after the top 15 schools. Total bachelor and master degree production
in the computing and electronics fields is approximately 75,000 per year. There are
also some 350,000 students in other science and engineering fields at universities
and polytechnics receiving degrees each year, and many of them enter the IT
industry upon graduation.
Training in the latest technology, English-language skills, and other work-oriented
topics are also important to the Indian software industry. This training is offered both
by many independent training organizations and some of the large IT companies
such as Infosys and Wipro, which run their own training operations.
China faces the same educational issue as India in building a trained workforce for
its software industry, but its approach is different, through centralized planning.
When the Communist Party came to power, it was committed ideologically to
education and the use of science and technology for economic development. Upon
the establishment of the People's Republic of China in 1949, the Western powers
pursued a policy of isolating China; a by-product of this was China’s adoption of the
Soviet Union’s model of comprehensive and specialized universities and a large
network of research institutes. In 1978, the Chinese university model was reformed
to one that more resembled that of the United States and emphasized
comprehensive universities. In the 1980s, China began sending many of its brightest
science and engineering students to the West, especially to the United States, for
graduate education. Nevertheless, the government research institutes within China
are still enormous and play an important role in graduate education. Until recently,
only a very few universities undertook research; their highest priority was pedagogy.
As in the case of India, Chinese universities graduate an enormous number of
students every year. In 2001, 567,000 students received their first degree, including
219,000 in engineering and 120,000 in science. The quality of these graduates varies
dramatically, but the sheer volume means that China has a large reservoir of
technically trained individuals.
Until 2001, Chinese universities neglected software studies as an academic
discipline. At the end of the 1990s, the Chinese government recognized that it had a
shortage of trained software personnel and called for improvement in Chinese
software capabilities as part of its central planning efforts. In response, 51 Chinese
universities established masters degrees in software engineering. These degree
programs quickly attracted students. Including all the different kinds of curricula,
China is now training about 100,000 people per year for the software industry. There
are internal criticisms of the education, including overemphasis on theoretical
education, insufficient attention to practice, and lack of familiarity with international
There are many challenges to implementing an educational response to offshoring.
Consider the challenges in the United States. IT work encompasses many different
occupations, each with its own skill and knowledge requirements. There are five
major types of undergraduate degree programs in IT, and each would require
revision in order to address offshoring. There are similarly four different degree
levels (associate, bachelors, masters, and doctorate) to revise. Non-degree
programs, such as certificate programs, corporate training, and non-traditional
universities all also play an important role in preparing the IT workforce. There are
multiple career paths in IT to take into consideration, not just the traditional one
from a college degree to a career in the same field. Universities are slow to make
changes in their employees and their course offerings. It is hard for national bodies
to predict and match supply and demand for the IT workforce, so it is hard for the
higher education system to know how to set its production levels. The mission of a
university is not only to prepare tomorrow’s workers; there are other goals such as
research, preparing tomorrow’s teachers, giving students a liberal education, and
teaching them to think critically that must be considered when revising a university’s
program to address workforce needs. Offshoring itself is rapidly changing (from
bodyshopping, to call centers, to business process outsourcing, to knowledge process
outsourcing and other higher value added tasks), so how is a higher education
system to know what occupations to prepare its students for? These challenges
mean that educational systems will have to continually adapt to serve well their
students and countries in the face of increased globalization.
Although the educational needs and issues may look different from different
national or individual perspectives, this study has identified six overarching principles
that should apply in developing as well as developed countries wishing to participate
in the global software industry.
1. There is a need to consider the levels of IT work that are predominant in the
national or multinational economy being served by the educational institution, and
which are likely to be predominant in the coming years. Software and IT work can be
thought of as consisting of a spectrum from the more routine (e.g. system and
computer maintenance and support, basic programming) through the more advanced
(e.g. application programming that requires knowledge of IT and specific
applications, whether business, science, media or otherwise, or sophisticated
systems programming and IT architecture development) to the advanced strategic
(development of approaches that utilize IT to advance the organization strategically
and provide it with a competitive advantage). As computer science and IT curricula
are developed, particularly at the national level, it is important to consider the levels
of workforce preparation to which the curriculum is addressed. In nations that are
current recipients of offshored work consisting of programming and routine software
testing and maintenance, for example, it may be desirable to focus the curriculum
more heavily on the lower levels. This may change, however, as the roles played by
IT professionals in these countries evolve and the offshoring providers aim to
perform higher level work. In countries that are seeing their commodity IT work
being offshored, it will be desirable for the curriculum to prepare students for the
middle and upper levels of IT work, where the ability to merge computer science and
IT with applications and strategy are important. This is likely to lead to an increased
emphasis on application knowledge and a reduced emphasis on programming skills.
It should be stressed that in all cases, however, the predominance of a certain level
of IT work in a certain nation or region is just a generalization; all levels will exist in
all countries, and students will be needed to move into all of these levels. It is the
statistical distribution that will vary.
2. CS education need to continue evolving, whether due to globalization or not.
The skills and talents needed by software and IT professionals have evolved over the
past half century, independent of issues such as outsourcing and offshoring. In
general, IT professionals are more likely to work in an application-specific context
than previously, and conversely, less likely to work on computer-specific areas such
as compiler or operating system development. They are more likely to work on large
software applications in teams that include applications specialists, and depending on
the organization, also to collaborate with sales and marketing staff. They are also
more likely to work in an environment where they are expected to be masters of
certain software platforms and interoperability standards, and know how to reuse
code. Thus in general, it will be increasingly important that a computer science or IT
education involves training that enables the student to work on large-scale software
applications, to understand important business, scientific, or other application areas,
and be familiar with the tools and platforms that are increasingly the standards in
the international marketplace. It also is increasingly important that the education
emphasizes teamwork and communication skills, especially as they are practiced in a
geographically distributed fashion.
3. There is a need for education to begin to prepare students for a global economy
and its possible impacts on their careers. It is increasingly likely that an IT
professional will be working in a global context. This may include being part of a
multinational team, or collaborating with customers or suppliers from other parts of
the world. Thus, it will be increasingly important that an education in computer
science and IT help prepare students for this global workplace. Education that
acquaints students with different languages and cultures, whether through courses,
study abroad, or other means, will be increasingly beneficial. Finally, to the extent
that English is the common language of the IT industry, the ability of nations to
educate their IT professionals to be fluent in English will be a major factor in
determining their success in the outsourcing economy and in multinational
4. Educational systems that help prepare students to be creative and innovative
will create advantages for those students and their countries. As the lower tiers of
software and IT work become more commoditized, creativity and innovation will
become even more important, particularly in countries that experience the loss of
support and programming work. The creation of new products and new businesses
will continue to lead to the greatest commercial and scientific successes, and even
more, become the differentiator between organizations and between nations.
Historically, some educational systems are seen as fostering creativity in students
more successfully than others. One crucial differentiator in fostering a creative
mentality in students is the research component of the educational system, and the
participation of students at all educational levels in the university’s research
enterprise. Another differentiator is the degree of rote learning versus more open
problem solving. Nations that currently have an advanced research enterprise in
their university systems may increasingly see this as their greatest competitive
advantage in educating computer science and IT students for the higher tiers of the
IT workforce. Nations that do not include a research component in their university
systems will need to consider whether, strategically, the investment in developing
this component and culture is needed to attain their goals for the IT economies in
5. Educational systems that not only pay attention to current business and
industry needs but also provide a core foundational knowledge will create
advantages for those students and their countries. To cite two national examples,
the Indian educational system has been particularly good at teaching the latest
technology that is needed in business and industry today. The United States has
been particularly good at teaching foundational knowledge that is likely to serve a
student through most of his or her career. Foundational skills help students remain
current, and not become obsolescent, as the technology changes rapidly around
them. Although the particulars of a new technology in the workplace may be
different from what a student was taught in school, a basic understanding of
computing principles and ways of addressing problems will remain current even as
the particular technologies change. Of course there needs to be a balance between
fundamentals and currently relevant technologies in the student’s education. In order
to prepare students to be productive workers when they enter the job market, it also
is important that the educational system pay attention to the current needs of
business and industry and select the technologies it exposes students to in order to
address industry needs. This goal can be achieved through respectful interchange
between people in the academic and industrial/business worlds. No IT education can
possibly fulfill all of the student’s educational needs for an IT career, however, and IT
workers should expect to have to engage in life-long learning in order to keep up
with the rapid pace of technological change and the rapid changes in the way that
organizations employ information technology.
6. A good educational system requires the right technology, a good curriculum,
good students, and good teachers. Fortunately, personal computers are relatively
inexpensive, software for them has been commoditized, and fast, inexpensive
broadband communication is readily available most places in the world. Thus, the
technology for training an IT workforce is within reach of much of the world. The
model curricula that have been designed by the professional societies have been and
should be used in many places around the world. There is probably value in
developing a process by which these curricula can have greater business and
industrial input and react more rapidly to changes in the way that IT gets used in the
world. Although adopted around the world, the model curricula have been designed
primarily for degree programs in the United States. If the professional societies truly
aspire to be world bodies and develop world curricula, they should pay attention to
the needs of other countries and their degree programs as well. Shortages in the
supply of students and teachers may be the most difficult problems to address. In
developing countries, there has been a marked decline over the last few years in the
number of students enrolling in IT degree programs, largely due to the perception
that offshoring has diminished career prospects in IT. In the United States, there are
also serious problems with the preparation of high school teachers who introduce
students to IT, and several times in the past (in the late 1970s and again during the
dot-com boom of the late 1990s) American universities had difficulty recruiting and
retaining quality faculty because of the lure of industrial IT positions. They also had
inadequate number of students obtaining doctorates, which are required to become
faculty members. In India, critics complain about the general quality of IT faculty,
salaries are low, and there have been no funds to enable research either by the
faculty members or their students. Inducements to improve the quality of the faculty
would be helpful in India, the United States, and other countries.
8. The Politics of Offshoring
Globalization, especially in its manifestation as offshoring, is a hugely disruptive
force that effects the national movement of wealth and jobs. In addition to the
educational responses to offshoring discussed above, countries might adopt political
responses. Developed nations might take political action to stem the loss of jobs and
wealth to globalization, either through protectionism or measures to make the
country more competitive. Developing nations might take political action to create an
environment in which its software export industry can flourish. Our initial focus here
is on the United States, which is largest global offshoring procurer.
Public policy debate about offshoring began in the United States as a result of the
wide news coverage of the report in November 2002 by Forrester Research that 3.3
million US jobs would be lost by 2015 as a result of offshoring. The most common
response to offshoring in the United States has been actions by the executive and
legislative branches of the state and federal governments to create protectionist laws
and executive decrees to control the movement of work out of the country. Bills have
been introduced that limit the citizenship or visa status of workers allowed to do
work for US organizations or require that call center operatives working outside the
United States inform callers of that fact. There are reasons to question the legality
and efficacy of this protectionist legislation. Some legal scholars believe that most
proposed state laws and executive orders will be ruled unconstitutional because of
the Commerce Clause of the Constitution, which leaves control of international
commerce agreements in the hands of the federal rather than the state
governments. Legal scholars also believe that proposed federal legislation on
offshoring may break existing international agreements. There is also a risk of
retaliation by other countries to protectionist American legislation. Overall, local and
state responses have been small scale and limited. The attitude of the Bush
administration has largely been to leave things alone, in the fashion advised by most
A second policy approach in the US has been to propose reforms to the H1-B and
L-1 worker visa programs. The purpose of these programs is to help US companies
find skilled workers, but critics claim that they are being misused as part of a
strategy that enables companies to export jobs, especially to India, or to bring
below-market-wage workers into the U.S.
A third approach is to ensure that US tax law, in particular US corporate tax laws,
provide no incentives to moving jobs overseas. These proposals would normalize tax
rules between the United States and other countries so that US-based multinationals
will have incentive to repatriate earnings to the United States that they earn in other
countries. Tax law is hard to enact; and even if it were enacted, there would still be
disparities because of costs of health care, safe workplace legislation, and
environmental protection. There has also been a visible effort by the US to get the
Chinese government to adjust its currency to a more realistic value.
A fourth approach has been directed at providing support to Americans who lose
their jobs through offshoring. In 1962, the US Congress passed the Trade
Adjustment Assistance Act to offer job training and extend the length of time of
unemployment benefits to American workers who have lost their job through trade
agreements. There has been a political and legal battle over whether the Trade
Adjustment Assistance Act does or should apply to software workers. Progressives
want to go beyond this act and also require companies to provide three months of
notification to workers whose jobs are to be eliminated because of trade, extend the
term length of unemployment benefits, provide wage insurance paid for by the
companies that offshore work to make up some of the drop in wages typical in the
displaced worker’s next job, improve retraining and reemployment services, offer
temporary health care and mortgage assistance, and allow multi-year income
averaging on federal taxes.
A fifth approach is to improve the innovation base. The basic idea is that, although
some jobs will undoubtedly be lost to low-wage countries, America can produce a
substantial number of new jobs, including many of them that are high on the value
chain, through policies that create a climate of innovation. Innovation policy
generally has four elements: making it more attractive for foreign students and
scientists to work in the United States, improving the educational system in the
United States, attracting US citizens to the science and engineering disciplines, and
increasing federal support for research and development. There have been numerous
criticisms that the United States is not now doing enough to build that innovation
base, and there are proposals under discussion by both Democrats and Republicans
in Congress, as well as suggestions from various non-profit organizations, to create
new innovation initiatives.
How do policy issues in other countries that offshore work compare to those in the
United States? Australia presents an interesting case study in the politics of
offshoring in that Australia offshores work but is itself a country that has benefited
greatly from free trade, both in terms of its important export markets for wheat,
wool, coal, wine, education, and tourism, and also for the range of products that are
available to its citizens through imports.
Debates over free trade arose in Australia over offshoring in 2004. There was
sharp criticism from the opposition Labor Party to the lack of policies protecting
Australian jobs and workers. Interestingly, the Australian Computer Society
published a policy paper that advocated free trade and resisted any protectionist
measures. Instead, it called for improvements in existing government programs to
help displaced workers with re-training and re-tooling, check-lists that would educate
Australian companies on the cost-benefit analysis of offshoring so that they would
not rush headlong into it, and changes in industrial policy to enhance Australian R&D.
The sitting Howard government was pleased with the report and outlined its own
policy initiatives, which included more government support for displaced workers, an
effort to increase foreign direct investment in Australia’s IT industry, and various
improvements in teacher training, educational programs, and educational
New Australian government data appeared this year, showing that many of the
temporary visas for skilled workers are held by Indians, and many of these visa
holders are doing programming work. These numbers concerned the Australian
Computer Society, and they have taken harder-line positions on both the skilled
temporary visa program (known as “457” visas) and on a permanent residence visa
program, known as the General Skilled Migration Program. While still endorsing the
basic immigration policy of the Australian government, ACS has called for
adjustments in the 457 system to make it fairer. It has also called for the permanent
immigration program (General Skilled Migration Program) to be substantially reduced
until the market can absorb ICT graduates from Australian universities, Australian
computer science enrolments begin to increase, and unemployment levels for
computer workers fall to the level of other professions in Australia.
Sweden provides an example of the policy stance of a Western European country
that engages in offshoring. The Swedish economy and welfare has benefited greatly
from a long tradition of free trade, starting in the late 19th century. The policy
includes agreements between employer and worker associations on the basic
principles for wage setting and job assurance and a commitment to overall Swedish
industrial competitiveness in knowledge-intensive and high-wage industries. This
industrial policy caused Sweden to create one of the biggest high-technological
industries in the world; and it has among the highest rates of investments in R&D
and outputs in terms of scientific publications and patenting. Sweden has also
become one of the most internationalized economies in the world, having a high
dependence on foreign trade for its Gross Domestic Product. Part of its industrial
rationalization is through offshoring to countries with lower production costs.
On several occasions, specific industrial policy measures have been taken by the
Swedish government to support industries with low and decreasing international
competitiveness. In the 1970s, considerable industrial support was given to the
steel, clothing, and marine industries when they faced large-scale failures, but the
measures turned out to be futile. As a consequence, Swedish policy has to a large
extent returned to the basic policy principles of free trade, so in the current
globalization trends Swedish policy is almost completely free from protectionist and
direct job-protection arguments. There have, however, been a number of initiatives
to improve Swedish competitiveness and counteract the negative impact of
offshoring. They are all related to a new national innovation strategy advanced in the
spring of 2004, which has three fundamental points: technological development and
R&D as the key to Swedish competitiveness, investments in large-scale public-
private partnerships to achieve centers of excellence in R&D for specifically targeted
industries, and reorganization and increased funding for R&D startups and growth of
small and medium-sized research-driven companies. Software is not explicitly
mentioned in the plan. In Sweden, software development and production is primarily
embedded in other manufacturing or service-providing value chains.
Turning now to the developing countries that export software service work, there
have been significant policy issues at the national and state levels that have shaped
the climate for the Indian offshoring industry. These include regulatory policy as it
affects foreign direct investment, taxation, building an infrastructure, protecting
intellectual policy, data protection and privacy, and education and training policy.
The regulatory history is the longest and most comprehensive of all Indian policies
affecting offshoring. From the 1950s to the early 1970s, Indian economic policy
focused on identifying ways for domestic companies to replace imports. Policies
enacted in the 1970s that severely limited foreign ownership in companies operating
in India drove out some multinationals, including IBM. Regulation in the 1980s
promoted the development of the hardware industry and identified software as a
promising export business; however, India had limited success in the 1970s and
1980s in building an indigenous IT industry. India was forced to liberalize its
economy in 1991 in the face of severe cash problems. The new industrial policy
included reduced licensing requirements in most industries, allowed foreign
companies to hold majority interest in Indian companies in many industries, provided
for automatic approval for hiring foreign technicians and foreign testing of
technologies developed in India, and reduced restrictions on the ways in which
mergers and acquisitions could take place.
Tax policy also had a shaping effect on the Indian software industry. In 1981, the
Indian tax code was revised to establish tax-free zones on profits and gains for
manufacturers, including software manufacturing. In 1993, the law broadened the
tax-free zones to include various science and technology parks. The law was again
broadened in 2005 to give tax breaks to software firms outside these parks.
Infrastructure policy also shaped India’s software industry. Laws intended to build
a favorable infrastructure and reduce labor regulations and other bureaucracy for the
software industry were enacted primarily by individual state governments, mostly in
the southern part of India. The one infrastructure issue subject to federal governance
was telecommunications policy. Beginning in 1991, the telecommunications sector
experienced a series of deregulations that continued until recently. Deregulation
enabled the Indian software industry to have access to a completely modern
telecommunications system with a capacity and cost that enabled the offshoring
service companies to be internationally competitive.
China provides an interesting contrast to India. China is a policy-driven society,
and one sees much more significant intervention of the state in the economic
development of the software industry in China than in India. The national software
strategy in India has been focused on the export service market, whereas the
Chinese are interested in capturing their domestic software product and service
markets as well as participating in the export market.
Until the 1980s there were mainly local rather than national companies in China.
Much of the capital available to businesses was tied in one way or another to the
state, and many of the decisions on capital allocation were made at the local level.
Since then, internal trade barriers have been dropped, enabling companies to build
scale and move into neighboring markets. In recent years, the national government
has promoted economic reform through competition among provinces and growth for
individual companies by access to capital through the national stock market.
Consolidation and focus on the international market has not yet occurred in the
Chinese software industry. As of 2002, there were over 6,000 software firms in
China; only 19 of them had sales exceeding $120 million.
Chinese policy towards forming technological capabilities has changed over time.
From 1978 to 1985, the focus was on central planning and state control. In the
period from 1985 to 1991, the focus was on enhancing the innovation system
through greater state support for both public and private R&D. Since 1992, the focus
has been on enabling market-oriented reforms to improve the quality of research
and the skills of the workforce, and to broaden the focus on development beyond the
defense and heavy technology industries.
The government has taken a strong hand is the development of trained personnel
for the software industry. This included not only new educational programs, as
described above, but also concentration of highly skilled software talent in certain
geographic areas, by having the government facilitate transfers of skilled software
personnel to the chosen places, including providing accommodation for their spouses
and children. The Chinese government has also provided incentives for overseas
Chinese software workers, especially managers, to return home through such
incentives as cash payments, cars, houses, and promotions.
The Chinese government supports R&D in universities, research institutes, and to
some extent industry. The best known of these initiatives is the Ministry of Science
and Technology’s High Technology R&D Program, known more commonly as the “863
program”, which has provided more than a billion dollars of government funding for
basic research since 1986. Other programs to provide research support include the
Development Fund on Electronic Information Industry, an R&D Fund on Industrial
Technology, and a Technological Innovation Fund. Although the government has
continued to support important state research institutes, such as the institutes of the
Chinese Academy of Sciences, there has been an effort to make them less dependent
on the state and encourage them to reach out to obtain external funding sources.
The government has also taken steps to improve the competitive business
environment. China does not have a long history of controlling anti-competitive
behavior in a technological sphere, and it has thus had to pass a series of acts that
protect a competitive environment, making illegal certain kinds of behavior such as
impugning another company’s reputation, bribing, threatening, and dumping. There
have been targeted tax reductions to companies that meet certain sales and export
figures. Exporting firms have been given favorable terms on bank loans, export
insurance, and taxes and duties.
China has one of the world’s worst software piracy problems. The Chinese
government has taken a series of steps to try to curb piracy. In addition to the
general copyright law, China has passed several laws targeted at fighting organized
crime that is manufacturing and distributed copies of pirated software. Government
organizations are coordinating anti-piracy campaigns, and are being encouraged to
be model citizens themselves by using no pirated software. A registry system has
been established, under which owners who register their copyrighted software are
given extra protections under the law. However, software piracy remains a big issue.
Politics is one of the ways (together with education, consumer boycotts, and labor
action) that nations can respond to offshoring. The general movement has been to
avoid protectionist legislation. Australia and Sweden have completely espoused free
trade even though they risk some level of unemployment for their IT workers. In
recent years, India has moved away from its protectionist and isolationist politics of
the 1960s and 1970s. The United States has had a number of protectionist actions
suggested, but most of these efforts have not been enacted into law, and today
there are calls for policies to enhance its competitiveness rather than to protect its
jobs by legal and economic barriers. China is the most protectionist of the countries
All of these countries understand that they have to make their national laws
conform to some degree with global practices if they want to be players in the global
marketplace. Thus China, for example, has been willing to revalue its currency
despite the short-term gain from keeping it artificially low; India has eased many of
its trade barriers; the United States has entered into numerous international trade
agreements; and Sweden has conformed to international monetary policies.
All of the countries studied here recognize that there are certain risks of sending
software work across national boundaries. These include questions of intellectual
property, privacy, and data security. Europe has taken the lead in strong privacy
policy, and India has seen the economic value in meeting European and US
standards on privacy. China is not so far advanced in managing these risk issues as
India is, but there is every reason to believe it will have to do so if it wishes to
continue to attract international business. China is struggling with balancing
openness of information with political control, and so far it leans in the direction of
control rather than individual rights.
For the developed countries that send work offshore, a common political approach
is to build new jobs and prosperity through policies that increase innovation. Sweden
is increasing government support for research and development, and there are calls
for this to be done in the United States. The two countries differ on parts of the
innovation platform, however. Sweden currently has an abundance of highly
educated workers, so it is not interested in ramping up its educational system. The
United States is facing declines in foreign scientists studying and working there, as
well as declining numbers of American students studying technical disciplines; so an
integral part of the innovation platform for the United States is to improve the
education system and attract foreign workers and students (to the degree this is
compatible with national security policies).
India and China have a number of similar policies for developing their offshoring
industries. Both are interested in ramping up their educational systems to supply an
adequate number of skilled workers for their IT companies. Both are concerned
about having adequate infrastructures (power, transportation systems,
telecommunications) to provide good service to their IT companies. Both have
adopted a series of policies intended to attract foreign investment. China has
implemented policies to try to produce a reverse Diaspora, so that native-born
scientists who have been working primarily in the United States and Europe return
home to be part of the senior technical and business leadership in their IT industries;
India has achieved this same effect without explicit national policies. India has more
experience in developing policies to support the export software market than China,
but China is advancing rapidly and has a more centralized government-planning
model in place.
9. Is IT Still a Good Career Choice for People Working in
Countries That Ship IT Jobs Overseas?
Almost every day one can find stories in the US press about people losing their IT
jobs because their positions were sent to a low-wage country. Many of these stories
quote talented young people who are choosing careers in other fields because they
believe there are no longer opportunities in IT. There are fears that it will not only be
low-level programming jobs that are sent to low-wage countries but also jobs that
require higher skill levels and are more highly compensated. If the world really is
flat, as Thomas Friedman proclaims, and a job can as easily be done in Bangalore or
Beijing as in Boston, then even if the job remains in Boston, eventually the wages
will fall in order to remain competitive with wages in other parts of the world. One
study has shown that if you are one of those who loses a job to trade, the chances
are that you will be paid less in your next job (Kletzer 2001).
All of this sounds bleak, but consider some interesting statistics on jobs as shown
in Table 1 and on salaries as shown in Table 2. They are both based on data from
the US Bureau of Labor Statistics, one of the most reliable sources available. There
is some lag in collecting and analyzing data so the most recent data is only from May
2004. Note what David Patterson, a computer scientist from Berkeley who is
president of the ACM, has to say about these numbers:
“Moreover, most of us believe things have gotten much better in the year since the
survey was completed. Does anyone besides me know that U.S. IT employment [in
2004] was 17% higher than in 1999—5% higher than the bubble in 2000 and
showing an 8% growth in the most recent year—and that the compound annual
growth rate of IT wages has been about 4% since 1999 while inflation has been just
2% per year?” (Patterson 2005)
How could it be that, at the same time jobs are being shipped overseas, the
number of IT jobs in the United States is growing rapidly and is even higher than at
the height of the dot-com boom? There are several possible explanations, but we do
not have adequate data to identify the one at play. One possible explanation is that
the very companies that are sending jobs overseas are prospering from the lower
costs of overseas labor which is enabling them to grow and create new jobs in the
United States and elsewhere. Another possible explanation is unrelated to offshoring
except that the background factors that make it possible are the same background
factors that make offshoring possible, namely, many industries are being reorganized
to make them more productive through the use of IT. Catherine Mann, an economist
from the Institute for International Economics, has conducted a study of Bureau of
Economic Analysis data for the years 1989-2000. (More specifically, her data is taken
from BEA Digital Economy 2002, Table A.4.4) She has found a strong correlation for
industry sectors between high productivity growth and high investment in IT (Mann
2004). She has also identified a number of sectors that still have low IT intensity and
thus are poised to take off as IT is introduced. These include health care, retail
trade, construction, and certain services. As IT becomes more pervasive in society,
there are more jobs involving either pure IT skills or combinations of IT skills and
skills associated with a particular domain such as finance or health care. Most of the
forecasts suggest that perhaps 2 to 3% of US IT jobs will be lost annually to
offshoring on average over the next decade. With the expanded use of IT in society,
it is very possible that the total number of IT jobs will grow at more than a 3% rate
over the decade. Thus it is not surprising that the US Bureau of Labor Statistics
forecasts that three IT occupations will be among the ten fastest growing
occupations over the coming decade (BLS 2002).
Even if the IT job market is a growth area over the next decade, some types of
jobs are likely to fall off, probably including routine programming jobs. As explained
in Section 1.8, there are many reasons that companies do not send work offshore so
there are likely to be jobs in almost every IT occupation to be found somewhere in
the United States; but perhaps in some of these specific occupations there will be
fewer jobs that there are today. It is very unlikely that the United States will be
completely devoid of even these most at-risk, routine programming jobs ten years
There are no fail-safe recipes for having a successful IT career, but there are many
things people can do to make themselves more attractive to employers. They can
get a good foundational education and keep up with current technology. They can
improve soft skills such as oral and written communication and teamwork skills.
They can get management training and experience. They can learn the processes of
a domain in which IT is likely to be increasingly important in the future such as in the
health disciplines. They can be prepared to work on tasks that are less routine and
that require regular discretionary judgment or that require regular interaction with
others (e.g., with customers or domain specialists within the company). They can
seek out jobs that involve knowledge of trade secrets or fundamental processes of
the company or that are involved with national defense. They can learn about other
cultures, the technologies for doing work in a geographically distributed fashion, and
other things about managing distributed work so that they can take advantage of
offshoring instead of being a victim of it. They can gain a wide array of experiences
so that they can be employed flexibly by a company and so that they gain an
overview of the way IT is being used in the company and its industry sector.
There are also some things that American (or British or German or Japanese)
society can do to assure that there continue to be good IT jobs for their workers.
They can nourish the innovation base that creates these jobs. This can be achieved
by adequately funding research and development, improving the educational system
at all levels, making sure that there continue to be opportunities for foreign scientists
and technologists to study and work in the country because of their important role in
driving innovation, and developing and enforcing rules for fair competition in the
international marketplace. We have discussed these issues earlier.
Table 1: Professional IT Employment in the United States (US Bureau of Labor
Statistics — Occupational Employment Statistics)
May Nov. May Change, May 2003
to May 2004
Occupations 1999 2000 2001 2002 2003 2003 2004 # %
Computer and Information
26,280 25,800 25,620 24,410 23210 23,770 24,720 1,510 6.50%
Computer Programmers 528,600 530,730 501,550 457,320 431640 403,220 412,090 -19,550 -4.50%
Computer Software Engineers,
287,600 374,640 361,690 356,760 392140 410,580 425,890 33,750 8.60%
Computer Software Engineers,
209,030 264,610 261,520 255,040 285760 292,520 318,020 32,260 11.30%
Computer Support Specialists 462,840 522,570 493,240 478,560 482990 480,520 488,540 5,550 1.10%
Computer Systems Analysts 428,210 463,300 448,270 467,750 474780 485,720 489,130 14,350 3.00%
Database Administrators 101,460 108,000 104,250 102,090 100890 97,540 96,960 -3,930 -3.90%
Network and Computer
204,680 234,040 227,840 232,560 237980 244,610 259,320 21,340 9.00%
Network Systems and Data
98,330 119,220 126,060 133,460 148030 156,270 169,200 21,170 14.30%
Computer and Information
280,820 283,480 267,310 264,790 266020 257,860 267,390 1,370 0.50%
Computer Specialists, All Other 130,420 130,420
"Computer Specialists, All 2,627,850 2,926,390 2,817,350 2,772,740 2,843,440 2,852,610 2,951,260 107,820 3.79%
Computer Hardware Engineers 60,420 63,680 67,590 67,180 72,550 70,110 74,760 2,210 3.00%
TOTAL, including Computer
2,688,270 2,990,070 2,884,940 2,839,920 2,915,990 2,922,720 3,026,020 110,030 3.77%
Specialists, All Other")
Table 2: IT Mean Annual Wages (source: US Bureau of Labor Statistics)
1999 2000 2001 2002 May-03 Nov-03 May-04 May 2004) May 2003 - May 2004
Computer and Information
$67,180 $73,430 $76,970 $80,510 $84,530 $85,240 $88,020 5.60% 4.10%
Computer Programmers $54,960 $60,970 $62,890 $63,690 $64,510 $65,170 $65,910 3.70% 2.20%
Computer Software Engineers,
$65,780 $70,300 $72,370 $73,800 $75,750 $76,260 $77,330 3.30% 2.10%
Computer Software Engineers,
$66,230 $70,890 $74,490 $75,840 $78,400 $79,790 $82,160 4.40% 4.80%
Computer Support Specialists $39,410 $39,680 $41,920 $42,320 $42,640 $43,140 $43,620 2.10% 2.30%
Computer Systems Analysts $57,920 $61,210 $63,710 $64,890 $66,180 $67,040 $68,370 3.40% 3.30%
Database Administrators $52,550 $55,810 $58,420 $59,080 $61,440 $62,100 $63,460 3.80% 3.30%
Network and Computer
$50,090 $53,690 $56,440 $57,620 $59,140 $60,100 $61,470 4.20% 3.90%
Network Systems and Data
$55,710 $57,890 $60,300 $61,390 $62,060 $62,220 $63,410 2.60% 2.20%
Computer and Information
$74,430 $80,250 $83,890 $90,440 $95,230 $95,960 $98,260 5.70% 3.20%
Computer Hardware Engineers $66,960 $70,100 $74,310 $76,150 $79,350 $82,040 $84,010 4.60% 5.90%
The US Bureau of Labor Statistics (BLS) has two sources of occupational employment
data that can be used to estimate the number of IT workers in the United States. There
is the Occupational Employment Statistics (OES), based on semi-annual surveys of 1.2
million employers. The OES data were used in preparing Table1. The other source of
BLS occupational data is the Current Population Survey (CPS), based on surveys of
around 50,000 households per month. The two surveys are complementary; each has
its strengths and weaknesses. During the period of interest—1999 through 2005—the
two programs were in the process of changing their occupational classification systems.
The changes made were more likely to shift workers among occupations within the IT
sector rather than to move workers in or out of IT occupations; thus the aggregate data
are less likely to be affected by the changes in occupational classification schemes than
the figures for individual occupations. As an alternative to the OES data, some BLS staff
suggested we use also the CPS data beginning in 2000 because the occupational
classification data are reasonably consistent over this period. If one uses the CPS data
for aggregate time-series analysis of the years 2000 to 2005, the comparative results
are the same: there are more IT workers in the US at the end of this period—a period of
increasing offshoring—than there was at the height of the dot-com boom in the year
2000. (Here also time-series analysis should not be used for individual job categories.)
For more details about the OES and CPS data, see http://www.bls.gov/oes/home.htm
and http://www.bls.gov/cps/home.htm. The two data sets support the claim that IT
employment in the US has recovered by 2005 from the decline of the early 2000s in
spite of increasing offshoring.
10. Findings and Recommendations
Globalization and offshoring are primarily driven by the economics of businesses and
the drive to maintain or improve profitability and shareholder value, which in turn
comes from the increasingly competitive global business environment. Some
important conclusions follow:
I. Globalization of, and offshoring within, the software industry are deeply
connected and both will continue to grow. Key enablers of this growth are
information technology itself, the evolution of work and business processes,
education, and national policies.
The world has changed. Information technology is largely now a global field,
business, and industry. There are many factors contributing to this change, and
much of this change has occurred within the past five years. Offshoring is a symptom
of the globalization of the software-systems-services industry.
This rapid shift to a global software-systems-services industry in which offshoring
is a reality has been driven by advances and changes in four major areas:
1. Technology—including the wide availability of low-cost, high-bandwidth
telecommunications and the standardization of software platforms and
business software applications.
2. Work processes—including the digitalization of work and the reorganization of
work processes so that routine or commodity components can be outsourced.
3. Business models—including early-adopter champions of offshoring, venture
capital companies that insist the companies they finance use offshoring
strategies to reduce capital burn rate, and the rise of intermediary companies
that help firms to offshore their work.
4. Other drivers—including worldwide improvements in technical education,
increased movement of students and workers across national borders,
lowering of national trade barriers, and the end of the Cold War and the
concomitant increase in the number of countries participating in the world
II. Both anecdotal evidence and economic theory indicate that offshoring between
developed and developing countries can, as a whole, benefit both, but competition is
The economic theory of comparative advantage argues that if countries specialize
in areas where they have a comparative advantage and they freely trade goods and
services over the long run, all nations involved will gain greater wealth. As an
example, the US and India have deeply interconnected software industries. India
benefits from generating new revenue and creating high-value jobs; the US benefits
from having US-based corporations achieve better financial performance as a result
of the cost savings associated with offshoring some jobs and investing increased
profits in growing business opportunities that create new jobs. This theory is
supported to some extent by data from the US Bureau of Labor Statistics (BLS).
According to BLS reports, despite a significant increase in offshoring over the past
five years, more IT jobs are available today in the US than at the height of the
dot.com boom. Moreover, IT jobs are predicted to be among the fastest-growing
occupations over the next decade.
Some economists have recently argued that in certain situations offshoring can
benefit one country at the expense of another. While debate continues about this
aspect of theory/policy, the majority of the economic community continues to believe
that free trade is beneficial to all countries involved, though some argue that
globalization may lead to technology leaders’ losing their current dominant position.
In any event, economists agree that even if a nation as a whole gains from
offshoring, individuals and local communities can be harmed. One solution to this
potential negative impact is for corporations or their governments to provide
programs that aid these individuals and their related communities in once again
becoming competitive. The cost of such “safety-net” programs can be high and, thus,
difficult to implement politically.
III. While offshoring will increase, determining the specifics of this increase are
difficult given the current quantity, quality, and objectivity of data available. Skepticism
is warranted regarding claims about the number of jobs to be offshored and the projected
growth of software industries in developing nations.
Data for making good decisions about offshoring are difficult to obtain.
Government data as collected are not very helpful and do not adequately address the
specific issue of offshoring. The objectivity and quality of other data sources,
especially the data in reports from consulting firms and trade associations, is open to
question, as these organizations may be serving their own agendas. Projections are
always more suspect than data on current employment levels.
It is very difficult to determine how many jobs are being, or will be, lost due to
offshoring. The best data available are for the United States. Some reports suggest
that 12 to 14 million jobs are vulnerable to offshoring over the next 15 years. This
number is, at best, an upper limit on the number of jobs at risk. To date, the annual
job loss attributable to offshoring is approximately 2 to 3 percent of the IT
workforce. But this number is small compared with the much higher level of job loss
and creation that occurs every year in the United States.
Thirty percent of the world’s largest 1000 firms are offshoring work, but there is a
significant variance between countries. This percentage is expected to increase, and
an increase in the amount of work offshored is consistent with the expected growth
rate of 20 to 30 percent for the offshoring industries in India and China. Almost all
estimates are based on reports from national and international consulting firms and,
thus, subject to scrutiny.
IV. Standardized jobs are more easily moved from developed to developing countries
than are higher-skill jobs. These standardized jobs were the initial focus of offshoring.
Today, global competition in higher-end skills, such as research, is increasing. These
trends have implications for individuals, companies, and countries.
The report considers several case studies of firms and how they are addressing
offshoring, including software service firms in low-wage nations and four types of
firms in high-wage nations: packaged software firms, software service firms,
entrepreneurial start-up firms, and established firms outside the IT sector. These
cases show that the amount and diversity of work being offshored is increasing; and
companies, including start-ups, are learning how to access and use higher skill levels
in developing countries.
One example of a higher-skill area now subject to global competition is computing
research. Historically, the bulk of this research was carried out in only a few
countries - countries with high purchasing-power-parity adjusted gross domestic
product (PPP GDP) and with a relatively large percentage of PPP GDP devoted to
research and development. This situation is changing rapidly and the trend looks
inexorable. Many companies have established research centers in multiple countries.
Most of these companies retain strong research operations in their home country.
This fact, combined with increasing national research investment in India and China,
is leading to both an increase in the total worldwide investment in research and a
wider distribution of research activities around the world.
People are by far the most important asset in research. The historic advantage
held by Western Europe and the United States is not as strong today as in the past,
given the developments in the graduate education systems in China and India,
increased opportunities for research careers in those countries, and the rising
national investment in research. The United States, in particular, faces a challenge in
its inability to recruit and retain foreign students and researchers in the numbers it
did in the past. Its dominance in the research area is likely, therefore, to be
Finally, while there is no way of ensuring lifetime IT employment, there are steps
that students and IT workers can take to improve their chances of long-term
employment in IT occupations. These include obtaining a strong foundational
education, learning the technologies used in the global software industry, keeping
skills up to date throughout their career, developing good teamwork and
communication skills, becoming familiar with other cultures, and managing their
careers so as to choose work in industries and jobs occupations less likely to be
automated or sent to a low-wage country.
V. Offshoring magnifies existing risks and creates new and often poorly understood
or addressed threats to national security, business property and processes, and
individuals’ privacy. While it is unlikely these risks will deter the growth of offshoring,
businesses and nations should employ strategies to mitigate them.
When businesses offshore work, they increase not only their own business-related
risks (e.g., intellectual property theft, failures in longer supply chains, or complexity
arising from conflicting legal environments) they also increase risks to national
security and individuals’ privacy. Businesses have a clear incentive to manage these
new risks to suit their own interests, but nations and individuals often have little
awareness of the exposures created. For example, many nations have adopted
commercial off-the-shelf (COTS) software and Internet Protocol technologies in IT-
based military systems and critical infrastructure systems. Many COTS systems are
developed, in part or whole, offshore, making it extremely difficult for buyers to
understand all source and application code. This creates the possibility that a hostile
nation or non-governmental hostile agents (terrorist/criminal) can compromise these
systems. Individuals often are exposed to loss of privacy or identity theft. Bank
records, transaction records, call center traffic, and service centers all are being
offshored today. Voluminous medical records are being transferred offshore, read by
clinicians elsewhere, stored and manipulated in foreign repositories, and managed
under much less restrictive laws about privacy and security than in most developed
These risks can be managed by companies and governments through the use of
risk mitigation strategies. For example, businesses should minimize access to
databases by offshore operations and encrypt data transmissions; offshoring
providers should be vetted carefully; companies should have security and data
privacy plans and be certified to meet certain standards; and service providers
should not outsource work without the explicit approval of the client. Nations can
adopt stronger privacy policies, invest in research methods to secure this data, or
work on the development of nation-to-nation and international treatment of both the
data and how compromises will be handled.
VI. To stay competitive in a global IT environment and industry, countries must adopt
policies that foster innovation. To this end, policies that improve a country’s ability to
attract, educate, and retain the best IT talent are critical. Educational policy and
investment is at the core.
Building a foundation to foster the next generation of innovation and invention
• Sustaining or strengthening technical training and education systems,
• Sustaining or increasing investment in research and development, and
• Establishing governmental policies that eliminate barriers to the free flow of
Education is one of the primary means for both developed and developing
countries to mount a response to offshoring so their workforces can compete globally
for IT jobs. In fact, education has been a primary enabler of offshoring in the
developing countries. India has responded rapidly to the educational needs of its
software export industry, especially through its private universities and training
organizations. China is addressing the educational needs of its software industry
through centralized planning.
There are, however, problems with both the Indian and Chinese educational
systems. India provides poor quality higher education outside its top tier of
universities, the quality of the faculty is uneven, research opportunities are not
generally available to either students or faculty, and there is a tension between
providing a good education to a limited number of people and providing access for
all. The Chinese system is burdened with an emphasis on rote learning, a reward
system for faculty that has not yet been transformed fully to reward research by
faculty and their students, and problems moving from a central planning to a
competitive funding system that rewards merit and entrepreneurship.
Developed nations can use education as a response to offshoring in order to
protect national interests. It can, however, be complex for a nation to address
offshoring through education for several reasons: educational systems are complex,
with multiple degrees and multiple majors preparing one for an IT career; the nature
of the software work that is being offshored is changing rapidly; it is difficult to
forecast national supply and demand needs for software workers; governments can
only indirectly affect supply and demand in many nations; and it is difficult to
translate an educational response to offshoring into practical curriculum reform. For
example, the United States educational system is still trying to understand how to
change its curriculum to address application domain knowledge, a global workplace,
and maintaining its innovative edge. In addition, the United States faces long-term
challenges from falling interest and skills in math and science programs in its
primary education system. The European Union is struggling with the implementation
of the Bologna Directive to achieve a single European educational framework.
There are some general principles that all countries can follow to mount an
effective educational response to offshoring:
1. Evolve computing curriculum at a pace and in a way that better embraces the
changing nature of IT.
2. Ensure computing curriculum prepare students for the global economy.
3. Teach students to be innovative and creative.
4. Evolve curriculum to achieve a better balance between foundational
knowledge of computing on the one hand, and business and application
domain knowledge on the other.
5. Invest to ensure the educational system has good technology, good
curriculum, and good teachers.
Globalization of, and offshoring within the software industry will continue and, in
fact, increase. This increase will be fueled by information technology itself as well as
government action and economic factors, and will result in more global competition
in both lower-end software skills and higher-end endeavors such as research. The
business imperatives: profits, shareholder value, and inter-company competitiveness
will continue to play a dominant role. Current data and economic theory suggest that
despite offshoring, career opportunities in IT will remain strong in the countries
where they have been strong in the past even as they grow in the countries that are
targets of offshoring. The future, however, is one in which the individual will be
situated in a more global competition. The brightness of the future for individuals,
companies, or countries is centered on their ability to invest in building the
foundations that foster innovation and invention.
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